Market Talk
Obama Bid to End Too-Big-to Fail Undercut as Banks Grow (Bloomberg)
The Bailout Could Turn A Profit, but That’s Not Entirely A Good Thing (The Washington Post)
Banks Urge Fed Retreat on Credit Exposure (Financial Times)

Editorials & Opinions
Competition is Good for Governments (Gregy Mankiw in New York Times)
Fix Income Inequality with $10 Million Loans for Everyone (Sheila Bair in Washington Post)
Why Your Highway Has Potholes (Wall Street Journal Editorial)
The Conventional Wisdom of Tax Reform (James Kwak in The Baseline Scenario)
A Passage to India-Pakistan Peace (Michael Boskin for The Wall Street Journal)

e21 Reaction & Commentary

e21 presents the Spring symposium of the Shadow Open Market Committee, featuring keynote address by Congressman Kevin Brady, Vice-Chairman of the Joint Economic Committee. William Poole, former President of the Federal Reserve Bank of St. Louis, will also be a featured presenter. SOMC members – Charles Calomiris, Gregory Hess, Marvin Goodfriend, Peter Ireland, and Mickey Levy – will present position papers on issues related to Rep. Brady’s Sound Dollar Act and the Fed's monetary policy. For more information on Friday’s New York event, click here. For more on the SOMC, visit their website ShadowFed.org.

Washington Update

Congress moves toward full election-year footing with a symbolic Senate Tax Day Eve vote on the so-called Buffett Rule on Monday, but the remainder of this two-week work period will hold more mundane tasks. Named for the billionaire Berkshire Hathaway chief who complained that his secretary pays a higher tax rate than he does, the bill would require people who earn more than $1 million annually to pay a minimum “fair-share” tax rate of 30 percent. Despite a weeks-long publicity push by the White House and Senate Democrats, the measure will meet an anticlimactic end on Monday when Republicans filibuster it. Democrats hope to capitalize on opposition from Republicans such as Sens. Scott Brown of Massachusetts and Dean Heller of Nevada on the campaign trail during their reelection bids. After Monday’s cloture vote, the Senate likely will turn to a measure to help the cash-strapped Postal Service.

On Jan. 1 of next year, the federal tax bill for a typical middle-class household — making in the neighborhood of $50,000 — is scheduled to rise by about $1,750. This increase, which would come from the expiration of both the Bush tax cuts and the Obama stimulus, would follow a decade of little to no income growth for many people. As a result, inflation-adjusted, after-tax income for the median household could fall next year to its 1998 level, in spite of the continuing economic recovery. The middle-class tax increase is just the beginning of budget changes set to take effect at the start of 2013. Poor families would see their taxes rise somewhat, too. Total federal taxes for top-earning families would rise by tens or even hundreds of thousands of dollars a year. Spending cuts would also take effect, squeezing domestic programs — education, transportation, scientific research — and the military. All in all, the end of 2012 will be unlike any other time in memory for the federal government.

Market Talk

Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis. Five banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. -- held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve. Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

At a press briefing on Friday, senior Treasury officials had some good news to trumpet: The government’s bailout of the financial system during the crisis has cost less than expected.According to the most recent Congressional Budget Office estimates, the total cost of TARP has fallen from $700 billion to $34 billion. In 2010, the bailout of Fannie Mae and Freddie Mac was projected to cost $53 billion by 2020, and the White House now estimates that cost will shrink to $28 billion by 2022. Put together, all the government’s efforts to bail out the financial system in 2008 and 2009 could ultimately end up turning a profit for taxpayers--in the ballpark of $10 billion, according to the Treasury Department.

Wall Street banks are resisting a Federal Reserve plan to limit their exposure to individual companies and governments, warning it will cut a combined $1.2tn from credit commitments at Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America and Citigroup.David Viniar, chief financial officer of Goldman, Ruth Porat, chief financial officer of Morgan Stanley and their counterparts at six other banks argued that the plan would harm liquidity at a meeting three weeks ago with Daniel Tarullo, Fed governor, according to people familiar with the talks. The banks warned the proposed measures would also send ripples through international markets because their government bond holdings could be snared by the caps.The single counterparty limit was part of the Dodd-Frank Act reforms which are being implemented by regulators including the Fed, and is due to come into force next year.In an effort to prevent dangerous domino collapses, the law restricts the amount of exposure banks can have to a single counterparty to 25 per cent of their regulatory capital. The Fed is proposing to go further, adding a 10 per cent limit to the amount of exposure that financial groups with more than $500bn in assets can have to each other.

Editorials & Opinions

Should governments -- of nations, states and towns -- compete like business rivals? The question is simpler to ask than to answer. But it reflects why conservatives and liberals disagree on many big issues facing the nation. Most everyone agrees that competition is vital to a well-functioning market economy. Since the days of Adam Smith, economists have understood that the invisible hand of the marketplace works only if producers of goods and services vie with one another. Competition keeps prices low and provides an incentive to improve and innovate...For much the same reason, competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them. So why not let everyone participate? Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Nothing shows off the worst of Congress like a highway bill. And this year's scramble for cash is worse than ever because the 18.4 cent a gallon gasoline tax will raise $70 billion less than the $263 billion Congress wants to spend over the next five years. Let the mayhem ensue. The Senate has passed a two-year $109 billion bill sponsored by Barbara Boxer of California that bails out the highway trust fund with general revenues, including some $12 billion for such nonessentials as the National Endowment for the Oceans and the Land and Water Conservation Fund. The bill requires little or no reform. The prevailing Senate view is the more concrete that gets poured, the more jobs back home. So more "shovel-ready" nonstimulus. House Republicans oppose the Senate version amid a $1.3 trillion deficit and have their own bill to give states more flexibility—though still not enough—on how to spend transportation dollars. Congress had to pass a temporary 90-day extension of highway funding through June 30 because the two sides can't agree.

In the Times this weekend, David Leonhardt has a generally good overview of the tax policy showdown that is scheduled for later this year, as the Bush tax cuts approach expiration on January 1. He outlines several of the central issues we face: “hypothetical solutions are a lot more popular than actual ones”; everyone says she wants tax reform, but the tax expenditures that would have to be eliminated are very popular; and any significant deficit solution will directly affect vast numbers of Americans. I have a few differences with Leonhardt, however. First, after his colleagues David Brooks and James Stewart, he seems to have fallen briefly under the spell of Paul Ryan: “Mr. Ryan’s plan would cut the top rate to 25 percent, from 35 percent, and still leave overall tax collection roughly where it has been, by eliminating tax breaks.”

With their sizable nuclear arsenals and tensions over territory, water and terrorism, India and Pakistan pose staggering risks to South Asia. But they also offer outsize economic potential for their citizens, the region and the world. Leaders in both nations seeking peace, stability and a prosperous future should seize on free trade as the best way to further these goals. The time has come for an India-Pakistan free trade agreement.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.